Mexico's government announced last month that it was compiling a drug-kingpin list that will bar financial institutions from doing business with anyone named on it. (Photo: ICE)

Wednesday, May 21, 2014

Perspectives

Mexico Money Laundering: Little Change

Mexico’s
new blacklist is unlikely to have a
significant impact on how banks fight money laundering in the short term,
experts say.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Mexico's government
announced last month that it was compiling a drug-kingpin list that will bar
financial institutions from doing business with anyone named on it. The list is
not being made public, but it will be available to authorities and financial
institutions. Will the new initiative mean big changes for banks and others in
fighting money laundering in Mexico? What things have Mexican authorities been
doing right and wrong in their latest anti-money laundering efforts? What more
can or should Mexico's government and financial firms do to crack down on the
practice?

Adalberto
Palma Gómez, senior partner at Aperture in Mexico City and executive president
of the Union of Mexican Financial Institutions (UNIFIM): At first, the news of the
Treasury and Finance Secretary's issuance of the blacklist, which will be
reserved for financial institutions' use, seemed like just one more list that
the institutions can use for the services they provide. For users, however,
this is radically different from the cases that currently occur as it will
complicate operations involving clients who are not part of the blacklist. From
this standpoint, we can see the risk that financial institutions are expecting.
It is necessary to understand that financial institutions are not only victims
of money laundering but also parties to be protected from it. They should not
be demonized, given the role that they play in the economy and in society. In
order to ensure the safety of the financial system, it is necessary to
strengthen all financial institutions and avoid the propensity for police
harassment of financial institutions' executives. Additionally, if the goal is
tracing money involved in money laundering, instead of dissuading the use of
financial services, it would be more effective to design mechanisms to enable
effective monitoring, without affecting operations, so that there are clues for
authorities to pursue.

Tapen
Sinha, professor of risk management at the Instituto Tecnológico Autónomo de
México: More
than 80 percent of financial transactions in Mexico today take place through
foreign banks--most of them American. So, whatever money laundering regulations
that are supposed to cover them are already in place through the Financial
Action Task Force. However, there is an incentive problem for the financial
institutions. They profit handsomely from such deals. The list of American
banks that have allegedly violated anti-money laundering laws is long. It includes
institutions like Bank of America, Citigroup, HSBC, J.P. Morgan, Wachovia and
Western Union. All of them paid fines but hardly anybody has gone to jail. Yet,
we know from indirect sources that billions of dollars have been laundered. So,
we would expect banks to do the bare minimum, if that, to reduce money
laundering. Mexican drug lords learned long ago that the best way to transfer
money is through 'ant carriers' who carry amounts that are slightly less than
what would be illegal to carry (that limit today stands at $10,000). There are
gaping loopholes. For example, if somebody has a large amount of money in his
favor on his credit card, it does not have to be reported. People use that
facility to launder money. Banks would rather not say anything about that
because it amounts to free cash for them. In this day and age, banks should be
required to report all transactions of all clients. It is cheap to warehouse
such data. Governments should be routinely cross-checking data across people
with the same names, similar names, same addresses, similar addresses, repeated
transactions and other identifiable characteristics. They should be routinely
checked through automated processes. For example, if somebody repeatedly
transacts $9,999, it should flag the system. Without this kind of continuous
monitoring, money launderers will always be one step ahead of the government.

Jan
Smith, partner at KoreFusion in Mexico City: Mexican Finance Minister
Luis Videgaray revealed plans to create a list of criminal suspects whose bank
accounts and front companies will be frozen. There is less corruption in the
Finance Ministry's Department of Finance and Tax than in police forces and in
the Attorney General's office, raising hopes about the blacklist's
effectiveness. However, this hope is offset by not making the list public.
There is open speculation this implies more high-profile names are on the list
than the Mexican government is comfortable in openly confronting. Furthermore,
there is no announced increase in investigative bandwidth within the
government. It is therefore unlikely the list will have a significant impact on
how banks fight money laundering in the short term. For that to happen, the
Mexican government has to make financial institutions more accountable and increase
its investigative reach.

Andrés
Rozental, member of the Advisor board and president of Rozental &
Asociados in Mexico City and senior fellow at the Brookings Institution: Any procedures and
information that help Mexican banks combat money-laundering will be welcome as
a way to ensure that organized criminals and others who engage in illicit
financial transactions find it increasingly difficult to do so. Financial
regulators have by and large transferred much of the responsibility for
anti-money laundering measures to banks and other financial institutions, but
without reliable information on who the potential actors are and how to detect
their operations, it's extremely difficult to find the needles in the haystacks
that effectively bar these transactions from taking place. Since several banks
in Mexico and the United States have been fined for ineffective monitoring of
suspect financial transactions, both the Mexican government and the
institutions have been much more diligent in working toward eliminating such
operations. Unfortunately, given limited human and technological resources and
the sheer volume of international money flows, it is nearly impossible to
guarantee that nothing slips through the cracks. However, I believe that both
the government and the institutions are deploying all the strategies available
to them to make sure that banking does not provide an easy route for criminals
to pursue their illegal activities.